Sure, you want more loyal customers. But are you building the right kind of loyalty?
Just ask grocer Green Hills Farms (GHF) of Syracuse, New York. This family-owned store of 22,000 square feet has a heritage of more than 75 years of outperforming the competition and earning weekly sales of $16 per square foot. The industry average is roughly $8-10.
The company categorizes its customers into four buyer groups: Diamond, at the top of the spending scale, followed in descending order by Ruby, Pearl and Opal. Roughly 300 customers qualify as Diamonds, regularly spending $100 or more weekly. About 1,000 customers are Rubies, spending $50-99 on average each week.
Although some customers consistently shop the store every two months or so, some top spenders visit three to five times a week.
When the store first started categorizing customers, management was convinced that lots of customers could be graduated to a higher level, but experience proved otherwise. The gap proved too wide, and trying to get lower-spending households—many of them price shoppers—to spend more was ultimately self-defeating.
So the company works hard to make sure that the big spenders get lavish attention. For example, it hosted a black-tie party in the store to get better acquainted with more Diamonds and Rubies. More than 200 customers attended.
GHF does ongoing tracking of whether best customers are truly getting their fair share of discounts. If they are not, the grocer simply devises a new promotion to make sure they do.
Conventional wisdom teaches us that customer acquisition is typically far more costly than customer retention, and, therefore, we must strive to make customers loyal. But not all customers are actually beneficial to the business.
We marketers must learn to identify and retain the most profitable type of loyal customers. As part of this series recognizing the growing importance of Customer Focus, I will offer guidance on recognizing and producing customers who have the most beneficial type of loyalty.
Consumer behavior researchers have classified customer loyalty into four types, with varying degrees of benefit to any business. A.S. Dick and K. Basen explain that the level of attachment a customer feels toward a product or service is a prerequisite to loyalty.
This attachment is shaped by two dimensions: the degree of preference (the extent of the customer's conviction about the product or service), and the degree of perceived product differentiation (how significantly the customer distinguishes the product or service from alternatives). Highest attachment occurs when a buyer feels both a strong buying preference and a high degree of difference among available products.
In addition to the level of attachment, the second factor that distinguishes a customer's loyalty toward a product or service is repeat patronage, or the frequency of purchase.
Combining these two factors, four types of loyalty emerge: low and high attachment levels are cross-classified with high and low purchase frequency, as illustrated in the following table:
Four Types of Customer Loyalty
|Low Frequency||High Frequency|
|High Attachment||Latent Loyalty||Premium Loyalty|
|Low Attachment||No Loyalty||Inertia Loyalty|
Loyalty, like many things in life, exists in grades. And just like ice cream, the Premium type is best. Here's how to identify each type of loyalty.
1. No Loyalty
For varying reasons, some customers do not develop loyalty to certain products or services. For example, I know a manager of a travel agency who goes anywhere in town to get a haircut—just as long as it costs him $10 or less and he doesn't have to wait. He rarely goes to the same place two consecutive times. To him, a haircut is a haircut regardless of where he receives it. (That he is almost bald may have something to do with it!) His low attachment toward hair services, combined with low repeat patronage, signifies an absence of loyalty.
Contrast this to a friend of mine who lives in New Jersey and drives two hours round trip into the city every six weeks. Each trip costs her more than $90 for hair color services and $22 for parking. Although less expensive and more convenient hair care services are readily available closer to her home, she feels strongly about getting the "right" hair color service and perceives the Manhattan salon as clearly superior to other service providers.
There's no question you want more customers like my hair color friend and less like the travel agency manager. Generally speaking, businesses should avoid investing in "no loyalty" buyers, because they will never be loyal customers; they will add little to the financial strength of the business.
2. Inertia Loyalty
A low level of attachment to your product or service, coupled with high repeat purchase, produces inertia loyalty. This customer buys out of habit. It's the "because we've always used it" or "because it's convenient" type of purchase.
In other words, non-attitudinal, situational factors are the primary reason for buying. These buyers feel some degree of satisfaction with the company, or at least not real dissatisfaction.
This loyalty is most typical for frequent purchases. It's exemplified by the customer who buys gas at the station down the street, dry cleaning from the store down the block and shoe repair from the nearby cobbler. These buyers are ripe for a competitor that can demonstrate a visible benefit to switching.
It is possible to turn inertia loyalty into a higher form of loyalty by actively courting the customer and increasing the positive differentiation he or she perceives about your product or service versus others available. For example, a dry cleaner that offers home delivery or extended hours could make its customers aware of this fact as a way to provide differentiation.
3. Latent Loyalty
A high relative attitude combined with low repeat purchase signifies high latent loyalty. When a customer has high latent loyalty, situational effects rather than attitudinal influences determine repeat purchase. For example, I'm a big fan of Chinese food and have a favorite Chinese restaurant in my neighborhood. My husband, however, is less fond of it. So, despite my loyalty, I patronize the Chinese restaurant only on occasion, and we go instead to restaurants that we both enjoy.
By understanding situational factors that contribute to latent loyalty, a business can devise strategies to help combat them. For example, the Chinese restaurant might consider adding a few all-American dishes to its menu to pacify reluctant patrons like my husband.
4. Premium Loyalty
Premium loyalty, the most easily leveraged of the four types, prevails when a high level of attachment and high repeat patronage coexist. This is the preferred type of loyalty for all customers of any business. At the highest level of preference, people are proud of discovering and using the product and take pleasure in sharing their knowledge with peers and family.
When I was starting my consulting and speaking business, a friend was newly inspired by the Quicken software program that automates one's checkbook. He insisted on bringing his program over and demonstrating it to me on my computer. He was displaying premium loyalty. No doubt, the Internet and its chat room and blog-type exchanges have spawned premium loyalty for many products and played havoc with others.
Conclusion: Follow Four Guidelines
Now that you know the breakdown, here's how to apply that knowledge. To earn as much beneficial loyalty as possible, follow these four guidelines:
- Attract and keep as few No Loyalty customers as possible.
- Find ways to leverage Latent Loyal customers.
- Upgrade customers with Inertia Loyalty into Premium Loyalty. To do this, you must find new and better ways to increase two elements:
- The degree of preference—the extent of the customer's conviction about the product or service
- The degree of perceived product differentiation—how significantly the customer distinguishes your product or service from alternatives
- The degree of preference—the extent of the customer's conviction about the product or service
- Continue to "stoke the flames" of loyalty among your Premium Loyalty customers by finding unique and new ways to bring value to their relationship with you.
Embrace these four guidelines to build premium loyalty in your business. It's the kind of loyalty you can bank on.
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